In the legal morass that is Android comes the latest news that Microsoft is suing Barnes & Noble, alleging patent infringement. Think about the surface absurdity of that one. Microsoft suing Barnes & Noble. Even The Onion hasn’t contemplated this scenario. So, what’s really going on here.

At a macro level, here’s what’s happening:

These kinds of patent lawsuits are so common that I’ve almost stopped looking at them altogether. Usually it goes like this:

Someone sues someone else.

The someone else counter-sues.

The two companies exchange patent cross-licensing agreements, usually with one side or the other having to kick in some cash.

There’s a slight twist to the whole Android scenario, again though one that’s not uncommon. Most of these patent lawsuits have focused on Android licensees and not the deep-pocketed Google. It only makes sense to go after the weaker players, albeit ones with sufficient funds to pony up.

What are all these people suing in the Android space trying to accomplish? It’s real simple. If you’re trying to sell an operating system into a market where Google is giving it away, you need to make the OS appear not to be free. In other words, you may not pay for the OS but by the time you factor in legal costs, your free OS all of a sudden isn’t so free. Somewhere along the line, Google is probably going to have to ante up to help its partners by resolving all of these patent infringement issues. It probably means Google’s going to have to write a check. The good news: they’ve got $34.9 billion in cash on hand and are printing more each quarter. So much for the chilling effect on Android licensees.

What’s particularly interesting about the Microsoft/Barnes & Noble case is that presages interesting competition in the tablet marketplace. Why should anyone be worried about Barnes & Noble or, by extension, Amazon? The Barnes & Noble Nook e-reader actually runs on Android. In effect, they’re selling a specialized Android tablet for $249. How can they do that when the rest of the Android tablet marketplace is horribly overpriced as I’ve recently blogged? Welcome to the new world of ecosystems and razors and razor blades. Amazon and Barnes & Noble can sell these devices at low (or no) margin because the economics of incremental margin on the razor blades (books and other digital content) is so compelling and predictable that it pays to seed the market with devices. That’s another reason why Apple, asides from supply chain efficiencies, can sell the iPad so competitively. It can count on a reasonable income stream from the AppStore while in the Android space, those margins go to Google.

Yes, I know that the Nook and the Kindle are not general-purpose tablets. Today. But the color Nook is pretty darn close. The Wall Street Journal’s Brett Arends even recently told readers how to turn their Nooks into tablets. He overstated his case to make a point: Barnes & Noble can do this easily and likely will. If not, they deserve to follow Borders into bankruptcy.

Netting it out:

Google is likely to have to share some of its profits with its ecosystem to cover legal exposures.

Google is likely to have to share some of its app store revenues with partners. Otherwise, the situation with competing app stores (already a fracturing standard) is going to get (much) worse rather than better. They need to do this one quickly.

In other words, Android tablets need to get cheaper and Google will have to share its app and advertising revenues to make that happen.

Players like Barnes & Noble and Amazon can become strong players in the tablet marketplace because they have the economic model and ecosystem to compete with Apple. Selling hardware alone is not much fun these days, and is only going to get worse.

My friend Larry Smith is one of the most thought-provoking people I know. We’re both members of a group called the Internet OldTimers and in a recent exchange there, he talked about being a subscriber to the print edition of The New York Times. I’m also a subscriber to the dead-tree version of the Times and Larry set me to thinking about why I still subscribe to the newspaper. What do I like about the print version and how is it different than online?

Editorial judgments are more clearly manifested. Placement means something as does inclusion. Online, placement is quickly ignored and all stories look the same. And with unlimited space, there’s no judgment expressed via inclusion.

Layout matters. A glance at a section front page tells me a lot in one glimpse and the reading of 50 words. That’s much less the case online where layout is so blindingly similar from story to story, site to site.

Sections matter. As I move from section to section, my mindset clearly changes. Online is a much more random journey with few boundaries and as a result, either the mindsets don’t change very much and/or they’re jarring when they do.

The delivery mechanism is well-suited to the use of the product. Paper is wonderfully portable. I read it continuously from the bed to the bathroom to the kitchen to the train. Online is bumpy and with few exceptions I don’t have a seamless experience across devices (although there are some interesting initiatives in this regard and I have high hopes for it once we finally bury this notion of the “three screen experience” to be replaced by the “integrated any-screen experience”).

I like what some publications are doing on the iPad (e.g. Sports Illustrated and Autoweek) and what the Times itself is doing with its Google Chrome app. (I’m not mentioning Rupert Murdoch’s The Daily because first, I haven’t seen it and second, I don’t like talking about Murdoch.) The Times’s Chrome app much more closely represents the newspaper experience. It’s familiar and preserves the assets I mentioned above and brings some additional value to online via contextual linking. But it doesn’t go nearly far enough.

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More importantly, I think what the good iPad publications show us is that the online news experience is not a newspaper or magazine brought online. It has to be a multimedia tour de force that brings new elements to the publication. It combines the best of newspapers with the best of television with the best of the Internet. We’ve gone through this with the addition of other media. Radio wasn’t merely reading the newspaper. TV wasn’t merely adding pictures to the radio. The great Internet “publication” will combine elements of all that has gone before it while adding those items that are uniquely Internet, including broad linking, commenting and sharing, creating an immersive, social experience.

I can see the utility of a pure tablet given how much I travel (which I think is its optimal use case: on the train/plane/Starbucks). I’d like to buy an Android tablet. With yesterday’s introduction of the iPad2, I am however left scratching my head. Even before this, I was wondering “how in the world can the Android tablets be priced 20-50% more than an iPad?” Hence, my list of the top 10 reasons someone would buy/pay more for an Android tablet.

What’s an iPad?

I’d pay anything to avoid enriching Apple.

I work at Google…although Google employees may hold out until the holidays to see if they’re getting one free.

Google Maps. Oh, you mean I can buy a third-party GPS solution that is every bit as good and works off

I’m too unhip to be let into the Apple Store. (There are those who actually posit the Apple Store as part of the reason. Apple doesn’t have to worry about retail margins so they can price below those who must support those margins too. I don’t think this is an excuse, though it is a factor.)

I hate waiting in lines to get technology products.

I drive a Lexus and have gotten used to paying premium pricing for the same products.

There must be a TCO argument in favor of Android, right?

XOOM sounds so much cooler than iPad.

If I’m stupid enough to buy an Android tablet right now, I’m stupid enough to pay a premium for it.

Truthfully, I really don’t understand it. I’d expect Android tablets to cost $100 less than an iPad. At least. At current price points, they’re going to kill the market. So, what do I think the real reasons are? I’m stretching here.

They know Android isn’t really ready yet for the tablet form factor so they’re pricing it so only the really committed will buy in now. Purposely keep the market away even while you’re dipping your toe in.

The various parties to the ecosystem are really that clueless to think that their Smartphone success will translate to the tablet market and that they can support comparable/premium pricing.

I’m a big admirer of Apple. They design incredible products. They innovate and, beyond innovation, they create new categories and approaches. They have been richly rewarded for that and are now the second highest valued company in the world, behind ExxonMobil. You know there’s a “but” coming. And it’s a big one. Is it good for anyone (other than Apple) — even you — when they put their hand so deep in everyone’s pocket and when they tell you and me how to do business? (Full disclaimer: I don’t own any Apple products. I have a Sansa MP3 player, because I like the Rhapsody subscription music model. I actually like the Microsoft Zune subscription model even better, because then I get to rent and own music, but that’s maybe my next device consideration. I have an Android-based Motorola Droid, largely because I’m on Verizon and won’t buy any electronic device without a replaceable battery, so no, I’m not getting on line for a Verizon iPhone. I do, however, own some really old Macs and an original, and still working Newton. And my introduction to the technology industry in 1979 was on an Apple II+. But I digress…)

The latest flap is over Sony’s e-reader application where Sony wants to enable users to buy books without paying Apple its 30% “tax.” Apple, however, is insisting that all purchases must be made “in-app”…and as such, Apple wants to take its share of the transaction.

So, let’s get this straight. Apple owns complete control over whether your application makes it into the app store and if they say no, there’s basically no “legitimate” way for you to get an application on to your phone. With Android, while the default is to only allow apps to come in through the Android market, a simple uncheck in settings allows you to install applications from any source. Apple will tell you that’s to protect the user experience. That’s the same argument the telcos used to exclude devices from their network until, paradoxically, the iPhone came along and led to a new OS-centric model of wireless carriers here in the States and opened up the market to innovation that had been stalled for a decade. In other words, bullsh**, Apple.

But that’s not enough for Apple. Once the app has been approved, they want their full share of any revenue generated and won’t allow solutions that circumvent their taxing mechanism, regardless of how consumer-friendly and/or app provider-friendly those solutions are. If you want to make money on the iPhone, pay us our 30%. (This one will get really interesting the first time Oracle and SAP get serious about mobile apps. Clash of the Titans anyone? But it probably won’t get to that. Read on.)

If this were any vendor other than Apple, the hue and cry would be so incredibly loud that it would drown out conversation about American Idol. But Apple, our little darling, gets away scot-free. Imagine if Microsoft said “any transaction that occurs on a Windows machine will henceforth and forever more involve a payment to Microsoft.” The antitrust lawyers would move so fast that time would actually go backwards. But Apple?

Actually, I think this time Apple made a mistake. A big mistake. This one is so outrageously wrong that it’s sure to draw scrutiny from all corners. This could be the proverbial straw that broke the camel’s back. Apple probably thought “well, it’s only Sony. Who cares about them any more.” The real target, of course, is Amazon whose Kindle software is available on all platforms (imagine that, not just iPhone and iPad) and whose sales enrich Amazon’s coffers. Amazon is a threat to Apple’s control of the ecosystem. If Kindle is the standard for some forms of digital content, how can Apple own the whole process they way they do with music and, increasingly, video? If someone is able to stand up to Apple and not pay their ransom, what does that mean for all the others who feel they are being held captive?

So Apple started with Sony. A trial balloon if you will. This, however, could instead become Apple’s trial by fire. What Apple’s trying to do here makes Google’s and Facebook’s privacy intrusions seem like a walk in the park. Quite simply, Apple is trying to put a meter on the flow of digital content over the Internet. I’m loathe to draw comparisons to what’s going on in Egypt this week. Clearly, that’s a real-life saga that dwarves anything we’re talking about here. However, it’s hard to ignore the parallels. Enough is enough. Whether it’s a military dictatorship or a technological one, at some point the citizenry/customers say this has gone on too long and we need to push back.

While I’m not of course predicting such a dire outcome, this could some day be remembered as Apple’s Waterloo. They’re inviting legislative scrutiny in the United States and around the world. They’re forcing their “partners” to stand up and revolt. And most dangerous of all, they’re risking the love and support of their fan base. If there’s a coordinated effort on the part of content creators across all media types (books, music, video and, with today’s announcement of The Daily, news and information) — heck, even without a coordinated effort — the risk to Apple’s reputation, position (and market cap) is considerable.

Apple is restricting choice, controlling innovation and enriching its coffers. And it’s not benefiting you. Enough is finally enough.

I do believe that this week may well have been the Zenith of Apple’s power. And that’s pretty remarkable to contemplate. Pride goeth before the fall.